Sunday, October 2, 2011

How to Prepare for an IRS Audit

If you receive a letter requesting that you come into an Internal Revenue Service office for an audit review, first make sure you are thoroughly familiar with the return you filed. Generally, the IRS agent will question only those items that were checked on the form letter you received about your audit. Those are the items you should study most carefully.

If the IRS is asking to see proof for some of the deductions you claimed, make sure you have the proof. This could include paid bills, canceled checks and paycheck stubs showing deductions that you paid. If there is some item of proof you can’t find, don’t concede the point right away. If you no longer have a receipt for your attic insulation, for example, you might be able to get a letter from the contractors who installed it. The agent may accept some other secondary form of verification.

The IRS agent may also accept your word on a few deductions if you have shown you are well prepared with proof on the other items in question. Remember to take all the proof with you to the IRS audit.

Under no circumstances should you ignore your IRS audit appointment. If the time the IRS has chosen is inconvenient for you, just call several days ahead of time and have the audit rescheduled. It is a good thing to remember that the agent is merely doing a job. Sure, he or she is trying to collect more tax for the government and you are intent on holding on to your money. Treating the IRS agent as an enemy, or raising your voice to inquire why they don’t go after the millionaires who pay little or no tax, won’t win you any points.

The agent is human. If you behave badly, he or she is more apt to look harder for a flaw in your return and that will cost you more than the examiner originally had in mind.

Neither should you go overboard in the opposite direction. Don’t try to make a friend of the agent or to flatter. If you are in sales, don’t offer an outlandish discount if the agent wants to buy something. The agent will be immune to such enticements. Don’t become so talkative that you volunteer information needlessly or say things that are irrelevant. You could trip over your own tongue by saying something that would open new lines of inquiry. Just answer the auditor’s questions simply and fairly.

If the agent requests proof of a deduction that you did not bring with you but that you know you can obtain quickly, tell the agent. Rather than settling now on a tax liability you really do not owe, you can come back another day with the proof. Arguing that a certain tax deduction was never disallowed before is likely to get you nowhere.

On the other hand, remember that the IRS agent is eager to avoid extra paperwork. He or she may be open to some honest tradeoffs, willing to forgo proving every bit of extra tax you might owe if you are willing to forgo proving every extra deduction you might take. If you and the agent agree on all issues, you’ll be told how much in additional taxes it’s going to cost and the agent will suggest that you sign an agreement form. Once you’ve signed you will have lost your right to appeal, so you may want to delay signing to allow yourself time to study the agreement.

If you do sign, make sure you agree to the numbers. If you agree to the change, you’ll receive a written report in the mail along with a bill for the additional taxes plus interest. If coming up with the additional cash all at once would constitute a hardship, ask the IRS to help set up an installment payment schedule. If at some point in the inquiry you feel you are not being treated fairly or that proper attention is not being paid to your statements, you have a right to ask for a hearing at the IRS appellate level.

Sometimes moving up to another level will restore calm to the proceedings and hasten some sort of compromise. In any case, it will give you the opportunity to present your side of the situation to a higher authority, possibly with better results.

There you will encounter an even higher level of tax expertise and an even greater chance for a compromise. Many observers report that at the examination level the representatives see things as only black and white. At the appellate level the IRS personnel recognize that there could be gray areas, and that a little give and take on both sides might hasten a compromise.